Europe

One of the big support mechanisms for the UK economy during this pandemic has been the availability of grants and corporate loans via the banking system, aided by unlimited liquidity from the central bank.

Our take on all of this is that the central bank has acted in a very targeted and timely way, adding large volumes of liquidity at even lower rates, along with significant capital to the banking system.

We noted with interest two headlines yesterday: Italy to suspend mortgage payments amid outbreak and RBS and NatWest offer mortgage breaks for customers affected by coronavirus

Monday was one of those days investment professionals will remember all their lives, and compare with similar standout days from the past.

This deal may well perform in the short-term, and we sincerely hope Alpha’s plan works, but we also recognise there is a high degree of execution risk and the domestic economy still has considerable headwinds.

Kicking off the new year, we expected the new issue market to be very active and we certainly haven’t been disappointed, with the good momentum created at the end of last year – thanks to the US and China reaching a ‘phase one’ agreement and the resounding victory by the Conservatives paving the way for Brexit negotiations to move forward – allowing pent-up borrowing demand to hit the market.

The European Central Bank faces quite a conundrum ahead of its upcoming monetary policy meeting on September 12. ECB President, Mario Draghi, has clearly signalled that a cut to the refinancing rate (currently at minus 40bp) is likely and markets are now pricing this in with an 85% probability. The problem is, the ECB has also signalled that it will simultaneously consider tiering the bank reserves this rate actually applies to.

Since the two anti-establishment parties (The League and Five-Star) formed a coalition and took control in Italy, markets have been uncertain on the domestic government policy that was promising many things to many people and ultimately creating considerable friction with the European Commission (EC).

The euro area bank lending survey for the second quarter of 2019, released yesterday, suggests European banks are becoming more cautious and beginning to tighten lending criteria to various parts of the economy.

“…everybody’s having fun. Look to the future now, it’s only just begun.”

“This time next year, Rodney…”

Bloomberg reported on Monday that since the European Central Bank started its Corporate Sector Purchase Program (CSPP) in June 2016, it has purchased €177bn of investment grade rated corporate bonds. Initially, as expected, spreads tightened rapidly, but since the first quarter of 2018, they have been gradually widening back out to pre-CSPP levels.